Great profits - Bad Volatility
Creation Date: 12/22/2008 10:47 AM

#1
I've been running a strategy and the results seem to be really good. I've averaged about 2% per month over the last 5 years. My problem is that I could show 50% some months and minus 20% some months. For my peace of mind, I'd like to cut down on the volatility even at the expense of a significant loss of profitabilty.

I need to reduce the standard deviation of the monthly returns but I'm not sure how to change my script to affect this. I can reduce my losses by tightening stops but that's only on a per trade basis not on monthly returns. Also I'd like to use the standard deviation of the monthly returns as a user defined metric to get a handle on this during optimization, but not sure how to go about it.

Any suggestions would be really appreciated.

Cone

#2
How about doing a MC optimization on the Sharpe Ratio?

If you really want to make it hard on yourself though,
1. See SetOptimizeValue.
2. Look at how the Sharpe Ratio is calculation in the "Standard PerfScript".
3. Duplicate the SD of returns part of that calculation and use it in SetOptimizeValue.

Eugene

#3
QUOTE:
For my peace of mind, I'd like to cut down on the volatility even at the expense of a significant loss of profitabilty.

Try to experiment with the percent volatility technique for position sizing and/or managing open risk.

#4
Thank you both for your suggestions I'll start to work on it.

One question though, to the best of my knowledge, the Sharpe ratio in the results tab of the optimize tool, as well as the performance tab in the simulation tool refers to the individual trade volatility.

However, when I looked at the Sharpe calculation in the perscript it seems to be a function of a monthly return. My question is:

1. If this is true(Sharpe on monthly return)for performance view, this is what I want(but I don't know why "Help" defines it as on individual trades)

2. is the metric on Optimization also a monthly average?

3. if the Sharpe metric on the optimization on the trades is on idividual trades, should I use the perscript formula as you suggested for the monthly average Sharpe Ratio?

Sorry for the complications.

My best wishes for a happy holiday to you and your families

Cone

#5
1. The Help says "average percentage return of the trades" - that's the Avg variable - and those returns are based on the monthly change in Equity. (See the calculation in the Perf script.)

2. Each optimization permutation will generate 1 number in the same way a \$imulation generates 1 number for Sharpe Ratio. Based on those numbers, a Monte Carlo optimization will try to hone in on the simulation that maximize that number.

3. N/A

Happy holidays to you too!